Waiting For Mortgage Rates
As we have covered throughout the recent months, mortgage rates rose significantly. Even since August, mortgage rates have rose close to 2 full percentage points. And this dramatic increase has led to many new questions from buyers that seemed foolish to ask a year ago. With mortgage rates more than doubling in the year, waiting for mortgage rates to decrease might sound good on paper. However, here is some information that will allow potential buyers to make a decision about their home buying plans. Just a thought before we continue, waiting for mortgage rates to drop like many people were talking about in Q2 would have cost you thousands of dollars over the course of 30 years.
Impact Of Rising Rates
As mortgage rates continue to rise, they directly impact the purchasing power you have. By raising the cost of borrowing, it becomes more expensive each month to afford the same house at a lower rate. Couple decade-high mortgage rates with record high home prices, and you might see where the affordability issue comes from. Limiting the affordability of homeownership has created a problem for the first-time home buyers. Here is why waiting for mortgage rates to drop can cost you.
Assume that you would want to purchase a home for $400,000. Lets imagine that you try to shop around that price point with a monthly price-tag of around $2,500-2,600. The higher mortgage rates go, the more impossible that sounds. If you were to lock in your mortgage rate at the average right now in Louisville, KY, which is 7%, you would not be able to afford $400,000. In fact, you would likely be forced to come down to a more reasonable price of $380,000. If mortgage rates go even higher while you are ‘waiting for mortgage rates to drop,’ you could afford even less. However, there is one good thing coming from higher rates. That same $400,000 house from last year might end up selling for around $380,000.
As the chart above shows, as rates go up, affordability goes down. This might seem like a ‘well duh’ moment. However, many people were waiting for mortgage rates to go back down when they were around 5% this year. We shared this same graphic about 4 months ago, and the graphic showed rates around 4-6%. Waiting for mortgage rates to drop would have led to actually paying more instead of less.
Waiting For Mortgage Rates To Drop?
Many people might be wondering when, and if, mortgage rates will decrease, leading to a increase in your purchasing power. According to some of the expert economists we follow, this could be a dream for buyers. In the coming months, there are not much signs of rates coming down. There is signs that they will stagnate, however, a significant decrease is unlikely. According to realtor.com,
“Many homebuyers likely winced . . . upon hearing that the Federal Reserve yet again boosted its short-term interest rates by three-quarters of a percentage point—a move that’s pushing mortgage rates through the roof. And the already high rates are just going to get higher.”
And according to NAR (National Association of Realtors),
“There is no doubt that these higher rates hurt housing affordability. Nevertheless, apart from borrowing costs, rents additionally rose at their highest pace in nearly four decades.”
There could be an issue with waiting to buy, and that issue is directly correlated to your purchasing power. With your purchasing power likely to remain lower than it has been in recent years, today could be as good as a time as ever to buy. Also, do not forget that you could potentially refinance in the future.